The American Recovery and Reinvestment Act of 2009 was chocked full of many tax relief items to individual taxpayers and small businesses. While the specifics of the Act were subjected to many last minute changes in both the House and Senate, the outcome reflects Congress’ attempt to give targeted tax benefits to the middle and lower class Americans. At the same time, it seeks to boost economic recovery by allowing small businesses certain tax breaks. In the first of three blog posts, we will start with some of the tax breaks for individuals, specifically related to education and work credits.
Higher Education The American opportunity tax credit is a temporary increase and expansion of the Hope scholarship credit (for tax years beginning in 2009 and 2010). It increases the maximum credit per student from $1,800 to $2,500 and extends its availability from the first two years of post secondary education to four years. Nonrefundable under the prior law, the credit now becomes 40% refundable. The phase out range is increased to $80,000 to $90,000 for single filers and joint filers range is increased to $160,000 to $180,000. Expenses for course materials, such as textbooks, are added to the definition of qualified tuition and related expenses eligible for the credit.
Section 529 Plan Expenditure Expansion
For 2009 and 2010, the costs of computers and related technology qualify as higher education expenses for purposes of the rules governing distributions from a 529 qualified tuition plan, as long as the beneficiary of the plan is enrolled at an eligible educational institution. Internet access charges are also covered, as well as software, so long as it’s not for sports, games, or hobbies (unless the software is predominantly educational in nature).
Making Work Pay Credit
Intended to partially offset an employee’s portion of FICA and Medicare payroll taxes, this temporary credit is 6.2% of earned income up to a total credit of $400 for individuals and $800 for joint filers. It is retroactive to the beginning of 2009 and is set to expire at the end of 2010. It begins phasing out at a rate of 2% of modified adjusted gross income above $75,000 for individuals and $150,000 for joint filers. (See the March 25, 2009 Kiesling newsletter for additional information.)
Child Tax Credit and Other Items
The act extends for 2009 and 2010 the lower ($3,000) income threshold for refundability of the section 24 child credit, meaning more of it is refundable to low-income taxpayers. Other items directly benefiting less-affluent taxpayers or those in financial distress include a temporary increase in the earned income tax credit for 2009 and 2010, a one-time $250 payment to persons on fixed income not eligible for the making work pay credit and a temporary exclusion of $2,400 of unemployment benefits from taxable income in 2009.
Next week in Part 2 of 3, we will discuss the homebuyers credit, new car sales tax deduction and energy credits. For additional information, please talk with Brent McClure at Kiesling Associates.
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